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Egypt unrest could spark financial crisis

Egypt has substantial reserves to avoid an external payments crisis but these could be seriously depleted within weeks if political protests continue, while its banks may struggle to cope with a rush of withdrawals, says a report.
In the two working days after the protests erupted last Tuesday, which was a bank holiday, Egyptians and foreign investors transferred hundreds of millions of dollars out of Egypt, currency traders estimated.  
The government had $36 billion in foreign reserves at end-December, central bank figures showed. According to a January 27 note by Citigroup, it also had $21 billion of additional assets with commercial banks at end-October — its so-called “unofficial reserves”.  
Egypt has a financial war chest, “but the war chest is going to be depleted if this situation continues for several weeks rather than a few days,” said John Sfakianakis, chief economist at Banque Saudi Fransi.
“When markets begin to make bets against (the Egyptian pound), it will have a severe impact. The whole fiscal position of the Egyptian economy is going to be put to a very hard test if the violence, rioting continues for several weeks.”        
Egypt is vulnerable to a reversal of large flows of foreign portfolio investment that have been attracted by high yields on domestic government debt. Barclays Capital estimated foreign holdings of Egyptian assets before the protests were close to $25 billion, with roughly half held in Treasury bills and bonds.
Foreign direct investment is based on long-term planning and is less likely to be influenced by the political unrest. Egypt drew $6.76 billion of such investment in the last fiscal year to June 30, of which $3.6 billion went to the petroleum sector.
But the damage from any extended disruption to tourism could be considerable; Egypt earned $11.59 billion from tourism last fiscal year. It ran a current account deficit of $802 million in the July-September quarter of 2010, and because of tourism the deficit is likely to be much higher in the current quarter.
Equally worrying is the risk that middle-class and wealthy Egyptians will send more of their savings abroad.  These outflows might match or over the long term, even exceed money pulled out by foreign portfolio investors.  
Official figures are not available but a dealer at a medium-sized bank based in Cairo, who declined to be named, said clients at his medium-sized bank alone had transferred $150 million out of the country in two days. Some bankers said total outflows of funds from Egypt might have been at least $500 million per day last week.  
If outflows continued at that speed without accelerating, Egypt could lose over a quarter of its official reserves within a month.

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